Post-break, Spain yields resume march higher

Government announces new measures, to little market effect

MADRID (MarketWatch)—Investors returning from the Easter break on Tuesday took fresh aim at Spanish bonds, pushing yields to new highs for the year, as the market brushed aside the latest measures by the government to meet fiscal targets.

Yields on 10-year Spanish government bonds (10YR_ESP) jumped 19 basis points to 5.93%, the highest level since late November. Yields for 10-year Italian government bonds (10YR_ITA) also surged, up 31 basis points to 5.67%, a level not seen since mid-February. Pressure remains on Spanish yields

Meanwhile, the yield premium demanded by investors to hold 10-year Spanish bonds over German bunds of the same maturity widened to 4.28 percentage points from 3.87 percentage points last Thursday, according to FactSet Research.

Yields last week reached levels not seen since just before the European Central Bank kicked off its long-term refinancing program, or LTRO.

As Spaniards were returning from their Easter break on Monday — financial markets across Europe took a four-day weekend — Spanish Prime Minister Mariano Rajoy announced further measures on the fiscal, financial and structural front aimed at regaining market confidence. He said in a press release the government is working on a plan to be presented in the coming days that will include extra cuts worth €10 billion ($13.1 billion) in health care and education.

Officials including Economy Minister Luis de Guindos have been on a steady media campaign aimed at trying to reassure financial markets, with a spate of interviews seen across Spanish newspapers among others in recent days. On Monday, de Guindos blamed the tension for Spanish markets on worries about a slowdown in Europe making it difficult for governments to get deficits under control.

He also tried to reassure over Spanish growth, saying it would return to growth in 2013 and introduced the idea of getting welloff Spaniards to fund part of their own health care. He reiterated at a conference on Tuesday that Spain doesn’t need a bailout, according to a report in The Wall Street Journal.

But speaking at the same conference, Miguel Angel Fernandez Ordonez, the head of the Bank of Spain, said more capital will be needed for Spain’s banks if the economy contracts further than the 1.7% expected by the government this year, the Journal reported.

Daniel Pingarron, strategist at IG Markets, said the downbeat U.S. jobless data released last week and losses for European stock markets on Tuesday haven’t helped sentiment in Spain, where the IBEX 35 (IBEX) dropped 3% to 7,433.60.

“Spain is the focus of attention at the moment, without gaining any positive effect from strong fiscal measures and announced reforms,” said Pingarron, in emailed comments, who added that sectors outside of banks are also getting caught up in country risk associated with Spain.

The government also said Monday that it wants to speed up ongoing consolidation in the private sector, and will accelerate sales of financial institutions in which it holds a majority stake.

Antonio Garcia Pascual, analyst at Barclays Capital Research, said the announcement on health care and education cuts is positive because outlays in those areas account for over 75% of regional spending. The key to reaching fiscal targets in 2012 and 2013 will be getting regions—responsible for two-thirds of the overall deficit slippage in 2011—to stay in line.

“We think market confidence will only be restored if the (quarterly) fiscal performance of the region governments (and the central government) shows they are implementing their budget according to plan,’ said Pascual in a note to investors.

Pascual said the positive effects from the LTRO efforts are now turning negative again because “Spain’s fiscal credibility is now in question.”

The first quarter saw about €1 trillion injected into Europe’s banking system, with Spanish and Italian banks among the biggest borrowers. From a high of 6.7%-plus in November, Spanish bond yields had dropped to as low as 4.59% in early February. 6.

He said the market continues to punish Spain for fiscal slippage, delaying the 2012 budget and the fight between Spain and European Union officials on the unilateral revision of the 2012 budget. “All of that makes the typical investor looking at the ‘Spanish glass’ as half empty,” he said.

Olivier Bailly, a spokesman for the European Union’s executive arm, reportedly said Tuesday that the European Commission has a “positive view” on Spain’s 2012 budget, but needs more time to take a look at budgets of its autonomous regions and social security system before deciding if more cuts are needed.

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Barbara
Kollmeyer

Barbara Kollmeyer is an editor for MarketWatch in Madrid. Follow her on Twitter @bkollmeyer.

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